Strict rate approval rules in several Canadian provinces are limiting auto insurers’ ability to respond to rising costs and evolving risks, potentially affecting long-term competition and availability of coverage, according to a new report from the C.D. Howe Institute.
The report, titled The Price of Over-Regulation: Assessing the Impact of Rate Controls on Auto Insurance Market Flexibility in Canada, argued that highly regulated rate-setting systems make it harder for insurers to adjust premiums in response to inflation, climate-related events, and other external pressures.
Author Gherardo Caracciolo (pictured below), a Fellow-in-Residence at the institute, found that these regulatory frameworks can delay premium changes and reduce insurers’ responsiveness to shifts in risk.
Caracciolo compared jurisdictions that follow “File and Use” models, such as British Columbia, Manitoba, and Saskatchewan, with those that required “Prior Approval” or a mix of both systems, including Ontario, Alberta, and the Atlantic provinces. His analysis suggested that insurers operating under stricter regimes adjust premiums by about 2.1 percentage points less than those in more flexible environments when facing cost pressures.
Using data from public and private insurers, along with Statistics Canada, the report highlighted a widening gap in some provinces between premiums collected and claims paid. This, the report said, may put additional financial pressure on insurers and limit their ability to offer competitive pricing or maintain certain lines of business.
“While consumer protection is a key objective of insurance regulation, a lack of flexibility in rate-setting may lead insurers to scale back offerings or withdraw from certain markets,” said Caracciolo. “That can reduce competition and, over time, limit the choices available to consumers.”
To address these challenges, the report recommended that provinces consider shifting toward simpler rate approval processes, such as “File and Use” or “Use and File,” while strengthening oversight in areas like market conduct and consumer disclosure.
Caracciolo also suggested that such a shift would allow insurers to better manage changing risks while maintaining protections for policyholders.
